Radiant Logistics, Inc (RLGT) Q2 2023 Earnings Call Transcript

This afternoon, Bohn Crain, Radiant Logistics’ Founder and CEO; and Radiant’s Chief Financial Officer, Todd Macomber, will provide a general Business Update and discuss financial results for the company's First Fiscal Quarter ended September 30, 2022 and Second Fiscal Quarter ended December 31, 2022. Following their comments, we will open the call to questions. This conference is scheduled for 30 minutes. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The company has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about the company that may cause the company’s actual results or achievements to be materially different from the results or achievements expressed or implied by such forward-looking statements. While it is impossible to identify all the factors that may cause the company’s actual results or achievements to differ materially from those set forth in our forward-looking statements, such factors include those that have in the past and may in the future be identified in the company’s SEC filings and other public announcements, which are available on the Radiant Website. In addition, past results are not necessarily an indication of future performance. Now I’d like to pass the call over to Radiant’s Founder and CEO, Bohn Crain.

Thanks, John. Good afternoon everyone and thank you for joining us on today’s call. First and foremost, I want to thank all of our loyal shareholders for being patient with us through this restatement process. It's fair to say that we've been battle tested over these last few years, driven first by the pandemic and associated lockdowns of 2020. We were all reminded of the essential role of transportation and logistics in keeping our economy moving. For us, this translated into the opportunity to play an active role in the fight against COVID by, among other things, delivering PPE, food and beverage, consumer goods, technology, and other essential products for our customers across North America and around the world. As the economy worked to recover from those initial lockdowns, we were presented with a different set of challenges and opportunities as we were able to help our broader customer base bring their supply chains back online in the face of an extreme shortage of transportation capacity, soaring fuel prices, and port congestion. In December of 2021, we experienced a cyber event that created its own set of challenges. And ultimately, we were put through our paces with the now completed rigorous review and restatement process. I will leave the detailed review of the numbers to Todd, our Chief Financial Officer, a little later in the call. But ultimately, the numbers speak for themselves. In the face of some very difficult circumstances, we have delivered some extraordinary results, generating over $80 million in EBITDA on $1.4 billion in revenues and have effectively paid off our bank debt along the way. We all know the cliché, that which doesn't kill you makes you stronger. But we've survived COVID, the cyber attack, and ultimately, we even survived the auditors, two sets. All kidding aside, as everyone has a chance to digest the numbers, it's a fair point of discussion. Why in the world would the company pay its accountants and lawyers millions of dollars, run the risk of being delisted and undergo the organizational brain damage to restate our financial statements for what amounted to $0.01 per share, particularly in light of the fact that the company was doing so well? Well, the answer is not by choice, I can assure you. Restatements come in different flavors. In our case, as the numbers show, the impact on our financial results was very small and the need for the restatement in the first place was very subjective, in my opinion. As disclosed in our public filings, the restatement related to our accounting for in-transit revenues and for the accountants on the call application of ASC 606. ASC 606 is a relatively new accounting pronouncement that provides guidelines for recognizing revenue, and a great source of incremental revenue for the accounting and consultancy firms out there. In the transportation industry, we historically recognize revenue on the delivery date. That was until ASC 606 came along and changed the rules of the game that required companies to begin to effectively recognize revenue on a percentage completion basis. These new guidelines became effective in 2018 and require considerable use of estimates in terms of expected margins and transit times, as these important inputs are not generally known until a shipment is ultimately delivered. These estimated in-transit revenues map to the face of our balance sheet as a contract asset. It is this individual line item on the face of our balance sheet that became ground zero for our restatement. Given the financial gearing of our agent-based business model, even a $10 million to $20 million swing in estimated revenue in relation to our $1.4 billion in revenue really doesn't have much of an effect on net income, EBITDA, or even working capital for that matter. Even so, the auditors concluded that the misstatement of contract asset, when viewed in isolation, could be seen as material to the reader of our financial statements, and therefore, require that we adopt their judgment as our own and restate our financial statements. This is the world in which we live. The fact that we were delivering record results, the fact that the effect of the restatement on net income, EBITDA, and working capital was negligible, the fact that we were effectively debt-free and at no risk of breaching any of our financial covenants, none of that proved to be relevant to the analysis. So why were in-transit revenues off in the first place? As previously mentioned, the accounting for in-transit revenues requires considerable use of estimates in terms of expected margins and transit times, as these important inputs are not known until a shipment is ultimately delivered. During the restatement periods, we experienced the cyber event and ultimately unprecedented shipment volumes that were subject to extraordinary congestion at our U.S. ports. These two factors frustrated our ability to accurately estimate our in-transit revenues. Even so, we recognize the need to improve our accounting for in-transit revenues and have a number of initiatives underway to improve our process. And while this process was nothing short of mind-numbing, now that we have it behind us, we view it as a positive byproduct of our significant growth over these last several years, and a testament to the strong work of our talented accounting and finance teams, and the ultimate proof of the overall integrity of our financial systems and our need to always strive for continuous improvement in all that we do. Okay, so now hopefully that's enough on that topic. Let me turn my comments to the great progress that we've been making on a number of other fronts, in addition to our record results. In August of 2022, we took the opportunity to refresh and expand our $150 million senior credit facility with a $200 million facility. Given what is going on now in the banking markets, we are really happy to have a new facility in place and fully available. This facility provides us with continued financial flexibility to access capital support and accelerate our growth strategy, as well as the ability to repurchase the company’s stock should we choose. To that end, we continue to make good progress in our balanced approach to capital allocation through a combination of strategic acquisition and stock buyback initiatives. In October of 2022, we completed the acquisition of our longtime strategic operating partner, Cascade Enterprises of Minnesota. And for the 18 months into December 31, 2022, we purchased approximately $16 million of our stock at an average price of $6.64 per share. And as of December 31, 2022, we have, for the first time in the company's history, even with the purchase of Cascade and the stock buybacks, no net debt with cash on hand of $62 million and total debt of only $53.7 million. And finally, our adjusted EBITDA for the trailing 12 months into December 31, 2022 sits at $82.8 million. And with the filing of these two most recent 10-Qs, we have now completed the process of bringing our filings current with the SEC. And we're excited to be able to get back to the business of leveraging our best-in-class technology, robust North American footprint, and extensive global network of service partners to continue to build on the great platform we have here at Radiant. As we previously discussed, while we remain very optimistic about our prospects for fiscal '23 and beyond, we are definitely seeing signs of a slowing economy and expect operations to return to more normalized levels and growth rates in the coming quarters. We believe we are well positioned with a durable, diverse service offering and strong balance sheet to support our customers and continue to execute upon our broader strategic initiatives. With that said, I'll turn it over to Todd to walk us through our detailed financial results. And then we'll open it up for Q&A.

Thanks, Bohn, and good afternoon, everyone. Today, we will be discussing our financial results, including adjusted net income and adjusted EBITDA for the 12 months ended June 30, 2022. Additionally, we will be providing financial results for the Q1 fiscal year '23 three months ended September 30, 2022 and the Q2 fiscal '23 financial results for the three and six months ended December 31, 2022. Q4 fiscal year '22 year end results are as follows. For the 12 months ended June 30, 2022, we reported net income attributable to Radiant Logistics of $44,464,000 on 1.46 billion of revenues, or $0.90 per basic and $0.88 per fully diluted share. For the 12 months ended June 30, 2021, we reported net income attributable to Radiant Logistics of $23,110,000 on 899.8 million of revenues or $0.46 per basic and $0.45 per fully diluted share. This represents an increase of approximately $21,354,000 over the comparable prior year period, or 92.4%. For adjusted net income, we reported $58,246,000 for the 12 months ended June 30, 2022 compared to adjusted net income of $34,548,000 for the 12 months ended June 30, 2021. This represents an increase of approximately $23,698,000 or approximately 68.6%. For adjusted EBITDA, we reported $80,918,000 for the 12 months ended June 30, 2022 compared to adjusted EBITDA of $49,003,000 for the 12 months ended June 30, 2021. This represents an increase of $31,915,000 or approximately 65.1%. Moving along to Q1. For the three months ended September 30, 2022, we reported net income attributable to Radiant Logistics of $8,433,000 on 331 million of revenues or $0.17 per basic and fully diluted share. For the three months ended September 30, 2021, we reported net income attributable to Radiant Logistics of $7,609,000 on 289.4 million of revenues, or $0.15 for basic and fully diluted share. This represents an increase of approximately $824,000 of net income over the comparable prior year period, or 10.8%. For adjusted net income, we reported $13,365,000 for the three months ended September 30, 2022 compared to adjusted net income of $11,090,000 for the three months ended September 30, 2021. This represents an increase of approximately $2,275,000 or approximately 20.5%. For adjusted EBITDA, we reported $18,515,000 for the three months ended September 30, 2022 compared to adjusted EBITDA of $15,247,000 for the three months ended September 30, 2021. This represents an increase of approximately $3,268,000 or approximately 21.4%. Moving along to Q2. For the three months ended December 31, 2022, we reported net income attributable to Radiant Logistics of $4,836,000 on 278.1 million of revenues or $0.10 per basic and fully diluted share. For the three months ended December 31, 2021, we reported net income attributable to Radiant Logistics of $6,539,000 on 335.8 million of revenue, or $0.13 for basic and fully diluted share. This represents a decrease of approximately 1.7 million of net income over the comparable prior year period of 26%. For adjusted net income, we reported $10,497,000 for the three months ended December 31, 2022 compared to adjusted net income of $11,908,000 for the three months ended December 31, 2021. This represents a decrease of approximately 1.4 million or approximately 11.8%. For adjusted EBITDA, we reported $15,349,000 for the three months ended December 31, 2022 compared to adjusted EBITDA of $16,709,000 for the three months ended December 31, 2021. This represents a decrease of approximately $1,360,000 or approximately 8.1%. Moving along to six-month results. For the six months ended December 31, 2022, we reported net income attributable to Radiant Logistics of $13,269,000 on 609.1 million of revenues or $0.20 per basic and fully diluted share. For the six months ended December 31, 2021, we reported net income attributable to Radiant Logistics of $14,148,000 on 635.2 million of revenues or $0.28 per basic and fully diluted share. This represents a decrease of approximately $879,000 over the comparable prior year period, or 6.2%. For adjusted net income, we reported $23,861,000 for the six months ended December 31, 2022 compared to adjusted net income of $23 million for the six months ended December 31, 2021. This represents an increase of approximately $860,000 or approximately 3.7%. For adjusted EBITDA, we reported $33,864,000 in the six months ended December 31, 2022 compared to adjusted EBITDA of $31,961,000 for the six months ended December 31, 2021. This represents an increase of approximately $1,903,000 or approximately 6%. With that, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

Thank you. We will now begin the question-and-answer session. Our first question comes from Mark Argento with Lake Street. Please go ahead.

Hi, Bohn. Hi, Todd. Good to hear you guys on a call and congrats on finally getting all that rigmarole behind you here. It was a long slog for you guys, but good to see the business continue to perform. I just wanted to drill down a little bit on some of your comments in particular. You had mentioned obviously the environment is normalizing here a little bit post COVID, and just with the economy slowing down a little bit or hopefully slowing down a little bit, can you kind of just maybe give us a little more color on what kind of a more 'normalized' environment means for you guys in particular, both at the gross revenue level but also what's a good kind of thoughtful run rate EBITDA for your business today? And now the business has changed since ‘19, ‘20, ‘21, you did $80 million last year in EBITDA or last fiscal year and a run rate basis something that is even greater than that. But maybe if you could just kind of point us around a little bit on what the new normal is.

It's becoming increasingly difficult to provide an answer. However, I will cautiously estimate that there are numerous variables at play and significant uncertainties in the market, compounded by widespread labor inflation. My best estimate for a normalized run rate EBITDA would be in the range of $55 million to $60 million currently. I should note that the first half of 2023 may not accurately reflect that run rate. During these initial quarters, the conditions have swung significantly, and if you're modeling at $60 million, I wouldn't necessarily attribute $15 million of EBITDA to the first and second quarters. There is obvious seasonality to consider, but similar to the previous period of unusually strong performance, I believe the first half of this year will also experience unusually weaker conditions. There have been reports regarding the market indicating that companies are working through excess inventories, and international trade is at a notably low level right now. Therefore, there’s a distinction between discussing what a normalized state might be and predicting results for the fiscal year ending in 2023, which I’m not ready to address. I hope this provides some clarity to your question.

That's very helpful. And then when you guys are thinking through that a little bit, and that's obviously still an incredibly healthy clip and well above kind of where you were running before you even got into the pandemic environment. But obviously the stock, where it’s trading, we could talk reasons why broader market overhang, having to deal with the time to get the restates done, whatever it might be, kind of cranking through you guys are in a net cash position. I know you've been active with the buyback. But do you ever think about potentially a dividend or any other types of opportunities either crank up the buyback here a little bit more aggressively or institute a dividend? Because if you're generating, call it, $55 million to $60 million, I know you're a taxpayer now, but you don't have any interest expense, it seems like you guys are gathering a cash flow machine. So any further thoughts on what you're going to do with all that cash?

I'm not envisioning that we would move to a dividend. I think we'll, as we kind of alluded to, kind of get back to our core business strategy, which we've been kind of taken off task somewhat by this restatement process unfortunately. So that would manifest itself as continuing to look for acquisitions that are more likely to be tuck-in type acquisitions, and doing our stock buyback taking a balanced approach to both. And as we kind of think about some of those things, one of the kind of very early on thesis for Radiant was providing exit strategies for our agent stations and kind of the built-in pipeline of potential tuck-in acquisitions of our agent stations, that opportunity remains very real and vibrant. And I think one of the trends we're expecting to find is ultimately an acceleration of conversion of agency stations to company-owned stores, because the fact is people aren't getting any younger, right? So I think those opportunities will present themselves. And it's good to have financial flexibility, right, and not to be over-leveraged because of all of the uncertainties. Had we been super aggressive in a buyback and been in this restatement period, that could have gotten a lot more uncomfortable. And believe me, it was uncomfortable enough as it was. So normalized leverage kind of 2.5x, trying to get back to our knitting of taking our free cash flows, notionally putting half of that to work on the buyback and half of it to work on transactions that we believe are accretive and of strategic value.

That's super helpful. Again, good to hear from you guys. And look forward and see how things play out here moving forward, but congrats on the great execution.

We're just happy you're here on the other end of the phone to talk to us. It's good to be here.

Next question comes from Jeff Kauffman with Vertical Research. Please proceed.

Thank you very much and congratulations on getting to the other side of the mountain here.

Thanks, Jeff.

So two questions, if I can. First one is I'm sure that between lawyers and consultants, accountants, etc., there's been a lot of expenses maybe a little bit more billable hours than would normally be the case. Is this been running through SG&A, because I noticed a big step up from a run rate of about $7 million.

Yes.

Okay. So it's been running about $2 million to $3 million extra per quarter, and that should start to go down now that this is done.

Correct. I estimate that the cost of the restatement was between $2.5 million and $3 million in total. I want to clarify that this is not on a per quarter basis. Additionally, some of those invoices have been delayed and have not been processed as quickly as anticipated.

All right, so let me recast that. In the third quarter a year ago, we went from a run rate of about $7.5 million per quarter, maybe low 7s up to a run rate of about $10 million a quarter. And that run rate is coming down a little. But it's kind of stayed up around $40 million a year from $28 million a year where it was running. So you're saying only $3 million of that might be related to this? What would the other $7 million or $8 million be?

We can talk after the call. I'd need to look into it further.

A part of it will be the incremental acquisitions that we've done, so you'll have Navegate there, you'll have our acquisition of Cascade will be two component parts.

Okay, well that's what I was fishing for there. Thank you.

I'm just trying to recall. I don't think that specific line item includes personnel costs, as those are listed separately.

Right. We got commissions, we got personnel and then we got SG&A. Okay. Now that we have numbers, I get a chance to go through the numbers. That's all. Okay, so the second question. Bohn, obviously, a lot of things are changing. And then you alluded to it in your comments. And we're getting back to normalization. And you alluded to some of the specific headwinds, right, that we're facing over the next six to nine months that are going to drag that down a little bit. But I'd love to hear a little more specificity if you could talk about maybe regions of the world, or maybe different industry groups where you're seeing. And then just kind of give us, because you've got a great view of trade going on globally, and how things are moving from A to B, could you give us a better feel for kind of where things might actually be getting better at the increment? And maybe where things are getting worse where it might not be as obvious as okay, we got a retail inventory correction going on.

Our core business is primarily focused on domestic boarding, and I'm pleased to share that this segment has been performing well in both our company-owned and agency stores. Canada has also shown strong results, particularly through our contract logistics combined with transportation services, which continue to benefit us significantly. Harry and his team are doing excellent work. We have some exposure to intermodal and truck brokerage through what was previously known as Clipper, and is now Radiant Road & Rail. This part of the business has faced challenges, similar to those experienced by many in the truck brokerage sector, as the economy slows down. Asset-based companies are capturing a larger share of freight than usual, leading to difficulties for brokerage firms. This situation will eventually improve as supply and demand stabilize. Moreover, the international trade area, particularly ocean freight, has been the most impacted, especially compared to the earlier boom experienced with ocean carriers in the Transpacific trade. The decline is noticeable, but we remain optimistic. Some of the slowdown has been attributed to the resurgence of COVID in China, their extended Chinese New Year celebrations, and prolonged holidays for manufacturing facilities. These factors have contributed to the current decline, but operations are beginning to resume. While things have been relatively quiet, we are starting to see signs of improvement, which we hope will lead to a more favorable situation.

And I guess when you're talking about the domestic business, green shoots, I remember during COVID, we were talking about how the trade show business and the cruise line business just wasn't there obviously, because we were all locked down. And I'm seeing a lot of cruise ship commercials on TV, and it seems like Las Vegas and Orlando are pretty busy again. I'm assuming that's kind of a green shoot for you as well right now, or have we anniversaried that or is that still accelerating in your book?

That is, but even beyond that just our core time definite North America domestic footprint and all the business we do is doing pretty well.

Okay, great. Well, thank you for hosting this call and thank you for answering the questions.

You bet. Thanks, Jeff.

Up next we have Jason Seidl with TD Cowen. Jason, please proceed.

Thanks, operator. Bohn, Todd, I think you guys could have played the Welcome Back, Kotter theme here. So I’m glad to have you back.

Damn, I wish I would have thought of that.

You got to call me next time. I'll give you some good theme music ideas. Just a couple quick questions on my end here. You talked about not having any net debt. That puts you in a very enviable position, but you don't want to have a net debt position for too, too long. So about how long between now and getting back to some of those 2x, 2.5x I think that you talked about in terms of what you're comfortable with, and if there are no acquisitions out there in the marketplace that suit your needs, should we just assume that you use or maybe just buy back stock?

Yes.

Okay. That's fair enough. And the other thing, obviously the restatement, a very painful process for you guys, but did it uncover anything that you sort of needed to do in terms of increasing your financial controls? And if so, what were those?

So I think the short answer is absolutely. We can always get better at what we do and kind of the stress test of the volumes and delays and all of those types of things identified areas where there was room for improvement. And so we're working on those. Kind of getting into the specifics, it really gets down to interacting with all of our various operating locations or nodes of the network and getting more engaged kind of with the field to make sure they're giving us the right data inputs to be able to do a better job with our estimates.

So I guess it's safe to say that, although painful coming out of this, you guys are stronger than when you went in?

Without a doubt, absolutely.

Perfect. Well, gentlemen those are my two there. Good to hear your voices again.

Good to hear yours too. Thanks, Jason.

The next question comes from Mike Vermut with Newland Capital. Please proceed.

Hi, everyone. I hope you’re all doing well. It’s great to wrap up everything. I’m optimistic that there won't be any more challenges ahead, making things easier from here on. Building on what has been mentioned, it’s remarkable that we have this net cash position and are coming off significant EBITDA. Even when normalizing, our balance sheet stands out; trailing, we're around 3.5x to 4x EBITDA, and possibly up to 5x when normalized. If you consider our current situation, we are close to the $5 mark, similar to where we were in 2015. Our EBITDA shows that we’re about 3x to 4x of what we had then, and our balance sheet is in excellent shape. For instance, if we allocated $50 million to buy back 20% of the company, we'd still be under-leveraged. Is there a time when you might say this situation is unsustainable, and we should expedite our actions since opportunities to adjust the capital structure like this don't come often? Given the company’s strong performance and the fact that it seems undervalued, it might be wise to seize this chance if sellers are willing. Would you consider accelerating the buyback at these levels?

It's definitely something we're considering. We need to keep evaluating the M&A pipeline and what opportunities are available. To emphasize my previous point, we're always seeking to invest our capital in the most effective ways. If we don't find better opportunities, we can be more aggressive with buybacks. I'm not sure if a tender offer would be very beneficial; there are instances where it has helped and others where it only results in significant consultant fees without acquiring shares. I'm not ruling it out; we will definitely assess it in our Board discussions. Regardless, we've shown that we can make significant progress on a quarterly basis simply by purchasing stock during our trading windows.

Look, the one positive this is, at this point in time, you can make a huge dent in the capital structure, right. And if others aren't willing to pay for this, then the company should. So you guys have done an amazing job, the valuation is absurd for what you've done with the company, so congrats on everything.

All right. Thanks, Mike.

We have reached the end of the question-and-answer session, and I will now turn the call over to Bohn Crain for closing remarks.

Thank you. Let me close by saying that we remain optimistic about our prospects and opportunities to continue to leverage our best-in-class technology, robust North American footprint, and extensive global network of service partners to continue to build on the great platform we have here at Radiant. At the same time, we expect to continue our balanced approach to capital allocation through a combination of our strategic acquisitions and stock buybacks. Through this multipronged approach of organic growth, acquisitions, and stock buybacks, we believe we will continue to create meaningful value for our shareholders, operating partners, and the end customers that we serve. Thanks for listening and your support of Radiant Logistics.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.